How to buy Bitcoin and cryptocurrencies

Purchasing Bitcoin and other cryptocurrencies has become easier by the day, thanks to an exponential market penetration.

Overall, they are four different ways of buying them.

Exchange

Just like stock and bond market exchanges, online crypto-exchange platforms facilitate the trade of cryptocurrencies between users. An exchange acts as a centralised marketplace and allows users to trade virtual currencies with fiat money (or other crypto-assets) at a given rate - decided by the market.

Exchange do not sell or buy out virtual currencies, they gather sellers and buyers onto a single platform, facilitate the trade and take a commission out of it.

Users do not own cryptocurrencies and digital assets stored on an exchange, since it is the exchange that holds the private keys associated with the public addresses. Storing digital assets on third party exchange does not grant ownership of an asset: it is an "I Owe You" (IOU) or a crypto derivative.

In other words, exchange promise to send virtual currencies to their owners only when they make the request.

Most exchanges are unregulated and are vulnerable to large scale attacks: funds stored on an exchange are not safe, and can be wiped out whenever they shut down or are hacked.

Pros

  • Low transaction fees
  • Fast turnover
  • Competitive environment allowing innovation in the market

Cons

  • Regulation implemented extensive KYC and AML policies
  • High risk of hack and trading fraud
  • Virtual currencies stores in exchanges are IOU

ATM

Bitcoin ATMs have kickstarted in November 2013, with world's first opening in Vancouver, Canada.

They are not proper "ATMs" in the traditional sense: they are machines connected to online crypto-exchanges that allow users to purchase and sell cryptocurrencies for fiat money, in the form of cash or credit and debit card payments.

Not every ATM offer bi-directional transaction services, as most of them are only "one-way" ATMs, meaning users can purchase but not sell digital assets.

These kiosks are located in major urban hubs - with a majority in North America - and allow users to purchase cryptocurrencies without going through extensive Know Your Customer (KYC) verification. This feature comes at a price, as transaction fees are above market rate and go as high as 9% per transaction.

Pros

  • Seamless experience for the less crypto-savvy.
  • Low KYC verification

Cons

  • High transaction fees.
  • Risk of physical attacks.

Over-the-counter

Similar to virtual currencies exchanges, Over-The-Counter (OTC) crypto-markets are platform that facilitate the trade of virtual currencies between buyers and sellers. However OTC operations are not listed on a public order books like with exchanges transactions.

It gives the opportunity to large holders (also known as whales) to trade discreetly without the market getting notice of a bulk order. A whale order could overwhelm exchange's capacity and dramatically move the price as per supply and demand dynamics.

In cryptocurrency, OTC markets are handled by brokers that exclusively deal with high net worth individuals and institutional clients looking for larger trades.

Pros

  • Discrete way of purchasing digital assets
  • Suitable for institutional clients

Cons

  • Relevant to larger size trades not the average holder
  • Brokers own the space

Peer-to-peer

At the end of the day cryptocurrencies are a just another form money. As fiat currencies are usually legal tender in a single jurisdiction, travellers require to exchange their local currency into a new one and often do so between peers.

Similarly, cryptocurrency holders can exchange digital assets with fiat and vice versa, as long as there is trust between transactors. 

Of course, there are risks of exchanging assets with strangers (physical attacks, counterfeit ...), but the same applies with exchanging fiat currencies or trading gold.

Pros

  • No identification required
  • No transaction fees

Cons

  • Finding relevant
  • Risk of physical attacks.